Everybody has got to start their crypto journey somewhere – with the first purchase, comes the curiosity about what the next steps are. Logically, many people opt for trading instead of just hodling cryptocurrencies in their wallets. For a crypto newcomer, it can be challenging to grasp the complex world of crypto exchanges, but in this article, we’ll try to break down the key difference among them – centralized (CEX) vs. decentralized (DEX) cryptocurrency exchanges.
What is a centralized crypto exchange (CEX)?
While this viewpoint is wrongly put, a lot of people identify crypto exchanges with centralized crypto exchanges. The main reason is probably their popularity – CEXs are often in the mainstream media, have a large number of active users, and this gives them credibility.
However, centralized crypto exchanges are a bit ‘’against’’ the original crypto commandments – thou shall not put trust in an individual or an institution when it comes to cryptocurrencies.
While all crypto exchanges serve for buying and selling of cryptocurrencies, CEXs do it with a middle man, an intermediary without whom a transaction wouldn’t be possible. Centralized exchanges are similar to banks in terms of transaction security – the 3rd party entity is responsible for the entire functioning of the system.
CEXs are definitely more accessible – you can easily buy any cryptocurrency for fiat money by connecting your card. Furthermore, you can simply go to your app store, download the exchange app, pass the KYC, connect your card, and start trading! And voila, anyone with a smartphone can be a trader.
To sum it up, CEXs main pros are accessibility and fiat/crypto pairs, while the main cons are trusting a privately-held entity and being rigorously monitored by authorities.
What is a decentralized crypto exchange (DEX)?
On the other hand, a decentralized exchange has no intermediaries and practices peer-to-peer transactions with the help of smart contracts. In this manner, transactions are trustworthy and secure while people can simply trade among themselves, without third-party interference.
DEXs aren’t that complicated, yet some people seem to find their mechanism a bit confusing – how can a transaction happen if there is nobody to guarantee all parties will receive their end?
The truth is, this trustless mechanism is far more secure since nobody can get their assets without the other party getting theirs, too. Additionally, DEXs are more advanced security-wise, it harder to hack them, and also almost impossible to reveal personal user information since KYC procedure isn’t required.
Decentralized exchanges have liquidity pools filled by liquidity providers – people who willingly put their assets to be traded and thus enabling supply for wanted cryptocurrencies while receiving profit in return. All in all, DEX systems work like a charm and are highly self-sufficient.
The key advantages here are trustlessness and security, while the disadvantages are high fees (but only for DEXs built on Ethereum – gas fees) and currency diversity.
PROs and CONs: a comparative analysis
Security
In the first aspect of this comparative analysis – security – DEXs take the win. Centralized exchanges are more vulnerable to cyber attacks, as we have seen in the example of Binance ($40 million stolen) and Liquid ($90 million stolen).
DEXs, of course, aren’t 100% immune to hacks, but their decentralized trustless nature makes them a harder target. While not a tech aspect, security and identity protection go hand in hand. A DEXs simply couldn’t reveal the personal information of its user simply because it has none. KYC procedure usually isn’t required, and when it is, it’s meant for large transactions.
Supply
This round goes to centralized exchanges. Apart from being easily accessible, CEXs offer a vast ‘’menu’’ in terms of pairings, especially with fiat money. Since the exchange itself is the asset owner, they can easily increase supply when needed, unlike DEXs.
DEXs are, nonetheless, more accessible to new crypto projects and tokens, requiring fewer conditions and, well, less financial compensation.
Regulation
And another win for DEXs! We have already mentioned that policymakers and governments require full transparency from CEXs, and they simply have to comply. DEXs, on the other hand, can’t share information they don’t have.
The ‘’blame game’’ isn’t possible in this case because there is no intermediary to carry direct responsibility.
If you are someone who values their privacy and doesn’t want to share personal information, unlike on CEXs, on DEXs you can swimmingly trade without revealing your identity.
Now you have it – a short comparison of centralized and decentralized crypto exchanges. While we cherish all crypto enthusiasts and industry as a whole, we strongly believe in decentralized finance, without monopoly or unnecessary complexities. If you’re searching for your go-to decentralized exchange, dexvers is happy to assist you on that journey!
Disclaimer: The information provided in this post is not legal, accounting, or financial advice. The information should not be construed as investment or trading advice and is not meant to be a solicitation or recommendation to buy, sell, or hold any cryptocurrencies.